1

MANAGEMENT ACCOUNTING

PROBLEM-1

The Redwood City plant of Crimson Components Company makes two types of rotators for automobile engines: R361 and R572. The old cost accounting system at the plant traced support costs to four cost pools:

Pool S1 included service activity costs related to setups, production scheduling, plant administration, janitorial services, materials handling, and shipping. Pool S2 included activity costs related to machine maintenance and repair, rent, insurance, power, and utilities. Pools P1 and P2 included supervisors wages, idle time, and indirect materials for the two production departments, casting and machining, respectively. The old accounting system allocated support costs in pools S1 and S2 to the two production departments using direct labor cost and machine hours, respectively, as the cost drivers. Then the accumulated support costs in pools P1 and P2 were applied to the products on the basis of direct labor hours. A separate rate was determined for each of the two production departments. The direct labor wage rate is $15 per hour in casting and $18 per hour in machining.

Now the plant has implemented an activity-based costing system. The following table presents the amounts from the old cost pools that are traced to each of the new activity cost pools:

Setups for R572 are 50% more complex than those for R361; that is, each R572 setup takes 1.5 times as long as one R361 setup.

2

Required

(a) Determine the product costs per unit using the old system. Show all intermediate steps for allocations, including departmental cost driver rates and a breakdown of product costs into each of their components.

(b) Determine the product costs per unit using the new system. (c) Explain the intuitive reason that the product costs differ under the two accounting systems. (d) What should Crimson Components do to improve the profitability of its Redwood City plant?

Include marketing and product-related changes among your recommendations. (e) Describe how experienced production and sales managers are likely to react to the new product

costs.

PROBLEM-2

Alaire Corporation manufactures several different types of printed-circuit boards; however, two of the boards account for the majority of the companys sales. The first of these boards, a TV circuit board, has been a standard in the industry for several years. The market for this type of board is competitive and, therefore, price sensitive. Alaire plans to sell 65,000 of the TV boards this year at a price of $150 per unit. The second high-volume product, a PC circuit board, is a recent addition to Alaires product line. Because the PC board incorporates the latest technology, it can be sold at a premium price; this years plans include the sale of 40,000 PC boards at $300 per unit.

Alaires management group is meeting to discuss strategies for this year, and the current topic of conversation is how to spend the sales and promotion dollars for next year. The sales manager believes that the market share for the TV board could be expanded by concentrating Alaires promotional efforts in this area. In response to this suggestion, the production manager said, Why dont you go after a bigger market for the PC board? The cost sheets that I get show that the contribution from the PC board is more than double the contribution from the TV board. I know we get a premium price for the PC board. Selling it should help overall profitability.

Alaire uses a standard cost system, and the following data apply to the TV and PC boards:

Direct labor cost is $14 per hour. Variable manufacturing support costs are applied on the basis of direct labor hours. This years variable manufacturing support costs are budgeted at $1,120,000, and direct labor hours are estimated at 280,000. Other manufacturing support is applied at $10 per machine hour.

Alaire applies a materials handling charge of 10% of materials cost; this materials handling charge is not included in variable manufacturing support costs. Total expenditures for materials this year are budgeted at $10,800,000.

Ed Welch, Alaires controller, believes that before the management group proceeds with the discussion about allocating sales and promotional dollars to individual products, it may be worthwhile to look at these products on the basis of the activities involved in their production. Welch has prepared the following schedules for the management group:

3

Using this information, Welch explained, we can calculate an activitybased cost for each TV board and each PC board and then compare it to the standard cost we have been using. The only cost that remains the same for both cost methods is the cost of direct materials. The cost drivers will replace the direct labor and support costs in the standard cost.

Required

(a) Identify at least four general advantages that are associated with activity-based costing. (b) On the basis of standard costs, calculate the total contribution expected this year for Alaire

Corporations products: the TV board and the PC board. (c) On the basis of activity-based costs, calculate the total contribution expected this year for Alaire

Corporations two products. (d) Explain how the comparison of the results of the two costing methods may impact the decisions

made by Alaire Corporations management group.

PROBLEM-3

Mountain View Hospital has adopted a standard cost accounting system for evaluation and control of nursing labor. Diagnosis-related groups (DRGs), instituted by the U.S. government for health insurance reimbursement, are used as the output measure in the standard cost system. A DRG is a patient classification scheme that perceives hospitals to be multiproduct firms where inpatient treatment procedures are related to the numbers and types of patient ailments treated. Mountain View Hospital has developed standard nursing times for the treatment of each DRG classification, and nursing labor hours are assumed to vary with the number of DRGs treated within a time period.

The nursing unit on the fourth floor treats patients with four DRG classifications. The unit is staffed with registered nurses (RNs), licensed practical nurses (LPNs), and aides. Following are the standard nursing hours and salary rates:

4

Following are the results of operations for the fourth-floor nursing unit for the month of May:

The accountant for Mountain View Hospital calculated the following standard times for the fourth floor nursing unit for May:

The hospital calculates labor variances for each reporting period by labor classification (RN, LPN, aide). The variances are used by nursing supervisors and hospital administration to evaluate the performance of nursing labor.

Required

Calculate the total nursing labor variance for the fourth-floor nursing unit of Mountain View Hospital for May, indicating how much of this variance is attributed to the following for each class of hospital worker: (a) Labor efficiency; (b) Rate differences.